Bonus Compensation Plans and Trends. MBA BEST Conference April

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1 QUALITY INDEPENDENT VALUE RELATIONSHIP EXPERTISE Bonus Compensation Plans and Trends MBA BEST Conference April Mr. Michael Blanchard CEO April 2016

2 Key Topics To Be Covered Total Compensation & Blanchard Surveys & Databases Base Salary Decisions Annual Incentives Long-Term Incentives 2

3 Elements of Total Compensation Total Compensation Cash Salary Compensation Compensation Incentive/Bonus Qualified Plans Compensation Equity Plans Non-Qualified Equity Plans Plans Qualified Plans Other Benefits & Perks Annual Salary Hourly Wages Annual Bonus Annual Incentive Plan Stock Options Restricted Stock Phantom Stock Stock Appreciation Rights (SARs) Performance Units Supplemental Executive Retirement Plans (SERPs) Salary Continuation Plans (SCPs) Deferred Compensation Plans (DCPs) Pension 401(k) ESOP Profit Sharing Supplemental Disability Long Term Care Employment Agreements Change-in- Control (CIC) Agreements Country Clubs, Auto Allowances, etc. 3

4 Compensation Trends Survey Demographics Blanchard Consulting Group conducted an online survey of 2015 compensation trends during the second quarter of A total of 133 banks completed the survey. The respondents included 54 public and 79 private banks. The asset size and regions of the respondent banks are summarized below. Asset Size Breakdown 19% 32% 25% 24% Region Breakout Northeast 5% Southeast 21% Southwest 10% Midwest 47% West 17% <$250M $250M-$499M $500M-$999M $1B and above 4

5 2015 Compensation Survey Demographics Blanchard Consulting Group conducted a 2015 compensation survey that gathered salary and bonus data from 124 banks representing 140 different positions. Participant Breakdown Asset Size (as of 3/31/2015) ($Millions) Asset Cut n Average 25th Percentile 50th Percentile 75th Percentile All Banks 124 $1,677 $299 $538 $951 <$500M 58 $291 $216 $292 $374 $501M-$1B 37 $698 $560 $668 $850 >$1B 29 $5,699 $1,300 $1,804 $2,627 Included 85 Banks from the Central Region Job Categories Include: Executive, Finance, Lending, Operations, IT, Retail, Compliance, Trust & Wealth Management 5

6 Salary Budget Increases Comp Trends Survey 92% Plan/Implemented Increases in % 92% 2015 Salary Increases Planned No 2015 Salary Increases 92% of the 133 participating banks increased salaries in 2015 The median expected increase of those banks was 3% (same as reported in our 2014 survey) 6

7 Salary Budget Increases 2016 Flash Survey Blanchard Consulting Group conducted a flash survey about 2016 salary budget increases in late The results of this survey and others are shown below. Projected Median Salary Increase Budget Number Projected 2016 Salary Budgets Survey Source of Orgs. Executive Exempt Non-Exempt Aon Hewitt 1, % 3.0% 3.0% Blanchard Consulting Group Financial Institutions % 3.0% 3.0% Crowe Horwath Financial Institutions % 3.0% 3.0% Economic Research Institute NA 2.7% 2.7% 2.7% Hay Group Insurance & Financial Services % 3.0% 3.0% Towers Watson 1, % 3.0% 3.0% WorldatWork 5, % 3.0% 3.0% 3% Is The New Norm! It s been this way in 2016, 2015, 2014, 2013,

8 Salary Increases Blanchard Compensation Survey ** Remember 3% is the salary budget number (not necessarily the % for every position) This table shows a sampling of positions from the Blanchard Compensation Survey and the median increase of the position market data (all orgs cut) from 2013 to Year Salary Blanchard Survey Position* Increase % Controller 3.5% Commercial Loan Officer III 9.5% Consumer Loan Officer I 7.3% Credit Analyst I 3.7% Loan Workout Officer 6.9% Compliance Officer 11.1% HR Manager 13.8% Help Desk Specialist 0% Personal Banker 0% Teller II 2.4% Electronic Banking Rep 11.0% Trust Operations Analyst 9.3% Closest to the two year salary budget increase of 6% *Note: Survey participants varied from 2013 to 2015, so this table is just illustrative, it does not include like sample matching 8

9 Base Salary Reviews & Job Benchmarking Step 1: Evaluating the Position 1. Review Job Description: duties, accountabilities, knowledge, skills, and abilities 2. Review Responsibility Level: supervision, decision making authority, impact on policy and procedures 3. Experience Level: necessary banking experience, supervisory experience, and education level Step 2: Review Market Compensation Data Example Resources: 1. Proxy data from publicly traded companies (executives) 2. Market surveys - regional, national, state (all employees) 3. HR department/compensation consultant s internal database 9

10 Market Pricing Example Market Salary Position/Benchmark Job Match Data Source DataCut N 25th 50th 75th Marketing Director Marketing Manager ABA $700M-$999M Marketing Manager BalComp >$250M Marketing Manager Blanchard $501M-$1B, Med = $668M Marketing Director Crowe $500M-$1B, Med = $664M Marketing Manager ERI 5 Years Experience Survey Average

11 Base Salary Review Steps (Cont.) Step 3: Determine Other Influences on Market Value 1. Asset Size: Evaluate market values based on the asset size of the Bank. Has a bigger impact on executive officer compensation. 2. Geography: Consider geographic location and impact on salaries. Cost of salary and wage levels (Economic Research Institute). 3. Production Level: Production positions may have a different market value for level of production. Examples: portfolio size or branch/region deposits may influence the market value. 4. Responsibility Level: Support positions may have a different market value based on responsibility levels, supervisory duties, or the ability to handle complex issues. Step 4: Determine an Appropriate Market Value for the Position/s Then for the Individual/s 11

12 Salary Increase Matrix This table shows an example of a performance-based salary increase matrix. The percentages will vary based on the bank s budget, the employee s performance, and the employee s positioning within their salary range. ** This is part of a STRATEGIC salary administration process ** Employee Salary as a Percent of Grade Midpoint Baseline/Target Percentage Increase = 3% Minimum to 90% of Midpoint 90.1% to 109.9% 110% to Maximum Low in Salary Range Middle of Range High in Range Employee Performance Rating Salary Increase Percentages Far Exceeds Expectations X% X% X% Exceeds Expectations X% X% X% Meets Expectations X% 3% X% Does not Meet All Expectations X% X% X% Fails to Meet Expectations X% X% X% 12

13 Performance Appraisals Critical piece is to ensure performance appraisal forms include job tasks and behaviors with measurable or quantifiable performance criteria. Limit the number of measures and focus on the critical success factors of the position. PERFORMANCE MAJOR ACCOUNTABILITES Achievement of end results measured against pre-determined standards. Emphasis on what is achieved. COMPETENCIES Critical behaviors, processes, skills, and abilities measured against expected and established standards. Emphasis on how things are done. MEASUREMENT 13

14 Fair Labor Standards Act (FLSA) Overview Established 1938 minimum wages, overtime, child labor, record keeping standards FLSA Minimum Wage - $7.25/hr. (if state higher it prevails) Overtime 1.5 x regular rate of pay for hours worked over 40 hours in a workweek Regular rate of pay includes nondiscretionary bonuses (i.e. performance-based) Requires overtime pay unless position is determined to be exempt Exemption Categories (Have Specific Definitions) Executive manage business, direct work of employees, hiring/firing influence Administrative work related to management of company, independent judgment Computer Professional systems analyst, programmer, software engineer Learned Professional work requires advanced knowledge, invention, imagination, artistic Outside Sales making sales or obtaining orders, engaged away from business location Highly Compensated - $100k or more and meet one duty in 1 st four categories ** Exempt positions must meet the salary basis requirement + all the requirements of one of the exemption categories ** Current Salary Basis Requirement = $455/week 14

15 FLSA Proposed Changes Overview Increase in Department of Labor (DOL) audits in recent years FLSA not functioning as intended Regulatory Noise: Working Families Flexibility Act Equal Pay Executive Actions Right to Know Initiative Senate push to increase minimum wage Restoring Overtime Pay for Working Americans Act Proposed Regulatory Change ** Proposal issued in June of 2015, public comment period ended September 2015 ** Finalization now looks to be pointing towards late 2016 (we shall see) Salary Test Change moves from $455/wk to 40 th percentile of US Census Bureau weekly earnings of all US workers $970/wk in 2016) - $50,440 Annually Highly Compensated Test Change moves from $100,000/year to 90 th percentile of US Census Bureau $122,148 for 2016) Indexing System includes a mechanism to annually update the salary test levels 15

16 FLSA What To Do? What Should You Be Doing Update Job Descriptions Understand reporting structures in the organization Identify exempt employees earning less than $970/week Understand current hours worked for exempt employees not meeting new salary level Strategizing potential plans Raise pay levels? Re-classify and pay OT? Re-classify, cut salary to adjust for expected OT cost (try to make it whole)? Re-classify and prohibit OT? Take a look at highly compensated people ($100k vs $122,148) Assess all classifications/exemptions and possibly adjust other positions if appropriate ** Remember anything done currently is likely to change slightly when final legislation is put in place, so be smart about pre-work 16

17 Annual Incentives 17

18 Annual Incentive Plan Payouts & Goals 95% of Banks Paid Incentives for 2014 Performance (2015 Blanchard Compensation Trends Survey) 4% 1% Incentive payouts No incentive payouts 95% No payouts for executives; however, will have some payout for staff 18

19 Types of Annual Incentive Plans Formal Performance-Based Plan 57% Pooled Approach/Profit Sharing Based on Profits at the End of the Year 12% Discretionary Incentive Plan 18% Currently Designing an Annual Incentive Plan 8% We Do Not Have an Annual Incentive Plan 5% Results from 2015 Blanchard Compensation Trends Survey (57%) of participants (up from 42% in our 2014 survey) have a performance-based plan. Almost two-thirds (61%) of the banks reported having a formal and central document that lists out the various incentive plan(s) and describes how each of the incentive plan(s) work. Almost three-fourths (73%) of banks reported their compensation committee has reviewed their incentive plans for risk. 19

20 Incentive Plan Goals Blanchard Survey The most prevalent profitability and/or strategic incentive criteria used: CEO Incentive Criteria: Sr. Management Criteria: - Net Income (63%) - Net Income (63%) - ROA (42%) - Loan Growth (52%) - ROE (35%) - Deposit Growth (45%) - Strategic Planning Goals (34%) - ROA (40%) - Loan Growth (33%) - Strategic Planning Goals (38%) - NPAs & Board Discretion (both 31%) - NPAs & Efficiency Ratio (both 33%) - ROE (32%) 20

21 Regulatory and Government Impact on Incentives CANNOT TALK INCENTIVES WITHOUT ACKNOWLEDGING REGULATIONS & THEIR IMPACT Regulators Joint Guidelines on Sound Incentive Compensation (June 2010) All Banks Impacts all banks (safety and soundness exams / CAMELS ratings). Supports pay-for-performance programs, as long as they do not encourage risk. Recommends a combination of both profitability goals and strategic goals. Incorporates a Risk Review as part of the regulatory review process. Encourages the use of stock grants or deferred compensation. Other Rules/Guidelines Dodd-Frank Clawbacks, Pay Disparity Ratio, Pay for Performance, Risk Reviews SEC Recently provided proposed guidelines on a required pay-for-performance analysis. Shareholder Interest Groups Say-on-Pay and Equity Plan Votes. Reg Z (Mortgage Lenders) Cannot pay incentives based on profitability, interest rate, or loan terms. 21

22 How to Reduce Risk in Annual Incentive Plans 1. Avoid excessive incentive payout opportunity levels and/or uncapped plans Ensure award opportunities are reasonable and appropriate 2. Review Performance Measures Variety of internal and external performance measures Ensure an appropriate number of measures (not one & not too many) Do not focus solely on single short-term financial metrics (i.e., ROA and ROE) Incorporate asset and credit quality metrics Include some level of discretionary adjustment Ensure a link to the Bank s strategic plan and long-term goals 3. Ensure performance targets are not set too high or too low Use historical bank and peer group information to ensure goals are appropriate 4. Use annual or multi-year performance payout periods Remove quarterly payments and short turnarounds on awards 5. Ensure appropriate plan approval, governance, documentation, and communication 6. Consider implementation of a Clawback policy 7. Consider deferring a portion of incentives in cash or stock 22

23 Clawbacks As of 2014 only 27% of Respondents Have a Clawback Policy Blanchard Survey 6% 67% 27% Clawback Policy No Clawback Policy We are working on implementing one Example Clawback Provision: The Bank may recoup incentive compensation paid to covered executives (or some other identified employees) in instances where: (i) the Bank issues a material restatement of its financial statements; (ii) a subsequent finding that the financial information or performance metrics used to determine the amount of the incentive compensation are materially inaccurate, in each case regardless of individual fault; (iii) a covered executive or lending officer engages in intentional misconduct; or (iv) the covered executive has committed ethical or criminal violations. In addition, the Bank may recover any incentive compensation awarded or paid based on a covered executive s conduct which is not in good faith and which materially disrupts, damages, impairs or interferes with the business of the Bank and its affiliates. The purpose of this policy is to help ensure executives act in the best interest of the Bank. The Compensation Committee will consider all relevant factors and exercise business judgment in determining appropriate amounts to recoup as well as the timing and form of recoupment. 23

24 Common Incentive Plan Design Tier Title/s Award Opportunity Levels Award Objectives Threshold Target Max Bank Department/ Individual I President & CEO X% X% X% 90% 10% II EVPs X% X% X% 75% 25% III SVPs X% X% X% 50% 50% IV MGRs X% X% X% 40% 60% V Experienced Staff X% X% X% 25% 75% VI Entry Level Staff X% X% X% 10% 90% Percent of Salary Weighting of Award Tier positioning varies by bank, but should be defendable and non-discriminatory Award opportunity levels will frequently vary based on asset size of bank + tier + compensation philosophy, salary levels, other available compensation programs Weightings of bank and department/individual goals in this example are just a guide these will often vary slightly from bank to bank and individual to individual 24

25 Annual Incentive Plan Payout Amounts The following table shows annual incentives as a percentage of salary for banks with assets between $250M to $5B. The data is based on market research and Blanchard Consulting Group s experience in the banking industry. Typical Annual Cash Incentive Payouts as a Percentage of Base Salary Industry Data Assets $250M-$1B and $1B-$5B Typical Allocation of Goals & Annual Award as a % of Salary Objectives (Assets $250M-$1B) (Assets $1B-$5B) Executive Target Maximum Target Maximum Company Dept./Individual CEO 20% - 30% 40% - 60% 30% - 50% 60% - 100% 90% 10% EVP 15% - 25% 30% - 50% 20% - 40% 40% - 80% 50%-75% 50%-25% SVP 12.5% - 20% 25% - 40% 15% - 30% 30% - 60% 40%-60% 60%-40% VP/Producer 10% - 15% 20% - 30% 12.5% - 25% 25% - 50% 25%-50% 75%-50% 25

26 A Sampling of Typical Bonus Opportunity Levels The 2015 Blanchard Consulting Compensation Survey gathered data on incentive plan award opportunity levels for various positions as a percentage of salary. This table provides a sampling of that data AIP Median Opportunity Levels (Cash Incentive Plan as % of Salary) Survey Position # of Incumbents Target (%) Max (%) Controller 85 10% 15% Accounting Clerk II 113 5% 6% Commercial Loan Officer III % 22% Commercial Loan Officer I 206 6% 15% Mortgage Lending Manager 80 10% 20% Mortgage Loan Processor/Assistant 300 3% 7% Credit Analyst II 191 7% 10% Loan Operations Manager 132 6% 10% Human Resources Manager 77 10% 15% Human Resources Generalist 90 3% 9% Administrative Assistant 318 4% 4% Information Systems Manager 50 15% 25% Help Desk Specialist 108 3% 6% Branch Manager: $25 to $50 Million 357 6% 10% Teller II 1,256 3% 5% Compliance Officer 83 5% 10% BSA Officer 60 6% 10% 26

27 Sample Incentive Plan Worksheet 1 Sample Incentive Plan Worksheet ABC Bank VP Executive A Salary = $100,000 PERFORMANCE RESULT FACTORS November 2015 Payout Maximum 30% $30,000 TARGET $15,000 15% Threshold 0% $0 Threshold TARGET Maximum Factor Weight Indiv. Weight Summary of Criteria Threshold Target Maximum 100% 50.0% 50.0% Overall Bank - 1 (Net Income) Department - 2 (Loan Growth, Deposit Growth) tbd tbd tbd tbd tbd tbd Notes: A) Incentive predicated on satisfactory audit and regulatory review and individual performance evaluation. B) The Bank will use a proportional approach to calculate incentive payouts for performance that falls in-between each of the above criteria levels. 27

28 Sample Performance Goals Performance Goals Examples How/When Will Specific Goals Be Determined Bank Performance Net Income ROAA / ROAE Earnings Per Share Efficiency Ratio Asset Quality Core Deposit Growth Raising Capital Strategic Planning/Budgeting Process? Department Performance Individual Performance Varies by Function Lending (lending growth, quality, profitability, yield, cross-selling) Retail (deposit growth, cross-selling, noninterest income) Operations (productivity, service quality, turnaround time) Varies by Role/Job Portfolio growth/quality Fee Income (except Mortgage lenders) Cross-Selling/Referrals Project deliverables Performance evaluation Executives Develop Goals with Function/Department Managers? Managers Develop Goals with Employees? For the first plan year, consider using annual performance review ratings as the basis for the individual level award criteria, unless other individual goals can be clearly defined and accurately tracked. 28

29 Long-Term Incentives 29

30 Equity Incentives & Longer-Term Compensation The table below from the 2015 Blanchard Consulting Group Compensation Trends Survey shows the prevalence of equity-based compensation programs/plans.* Stock options 41% Restricted stock 32% Stock appreciation rights (stock-settled) Stock appreciation rights (cash-settled) 2% 3% Phantom or synthetic stock 11% Deferred compensation plan (with both a company match or contribution and an employee contribution) Deferred compensation plan (with no company match or contributions) 20% 23% Supplemental retirement program (SERP, Salary Continuation, etc.) 35% We do not currently have any equity, "synthetic equity", or deferred compensation program(s) in place 14% * Respondents were allowed to choose more than one option; therefore, the percentages will not sum to 100%. 30

31 Long-Term Incentives Top Executive Increasing Use of Equity The portion of long-term incentives as a percent of total compensation has increased 2X to 3X from 2009 to Asset Size 2009 Proportion of LTI to Total Compensation 2013 Proportion of LTI to Total Compensation Over $1B 15% 26% $500M to $1B 4% 12% Under $500M 4% 7% 1 Based on proxy data from the Blanchard Consulting Database of public banks 31

32 Common Types of Equity-Based Incentives Real Equity - Actual shares of stock, which create real equity holdings and shareholder dilution Incentive stock options (ISOs) Nonqualified stock options (NSOs) Stock appreciation rights (SARs) stock settled Restricted stock Synthetic Equity - Value is tied to share price, but no real stock is transferred (cash payments) Stock appreciation rights (SARs) cash settled Phantom stock Performance shares Restricted stock units cash settled Reminders: ** Appreciation-based vehicles (example: stock options) - value is only created with appreciation ** Full-value vehicles (example: restricted stock) - value is immediate and is always there so long as share has value 32

33 Equity Incentive Plans Current Trends Full value shares are more prevalent than stock options The table below shows the prevalence of restricted stock vs. stock options in the Blanchard Consulting Group database of public banks. Prevalence Equity Prevalence in Public Banks Restricted Stock Stock Options Blend 2 All Banks (n=177) 47% 21% 14% Banks that Granted Equity in 2013 (n=98) 86% 39% 24% 1 Represents publicly traded banks in Blanchard Consulting Group's internal database 2 Blend indicates grants of both restricted stock and stock options 33

34 Equity Incentive Plans Vesting Executive Officers: Most Vesting Provisions in Executive Officer LTI Plans are 3-5 years. Stock Options: Typically a 3-5 Year Vesting 92% of stock options in Fortune 500 companies use Ratable Vesting 1 Ratable Vesting: Awards vest in tranches over the vesting period Restricted Stock: Typically a 3-5 Year Vest 40% of Restricted Shares use a cliff vesting 1 Cliff Vesting: Awards vest entirely at the end of the vesting period Most grants are based on the achievement of performance goals 1 The ClearBridge Report (January 2014) 34

35 Performance-Based Grants vs. Performance-Based Vesting 1. Performance-Vesting Methodology: Grants are made at the beginning of a performance period and vesting only occurs when pre-defined performance metrics are met. 2. Performance-Granting Methodology: Grants are made at the end of a performance-period (typically one year) with an additional 3-5 year service/time vesting after the grant. 35

36 Long-Term Incentive Plan Goals General Industry **An examination of three studies of Fortune 500 Companies found the following performance criteria most commonly used in LTI Plans 1 1 From the Equilar Journal of Compensation and Benefits and ClearBridge studies of Fortune 500 Companies. 36

37 Speaker Biography Mr. Michael Blanchard CEO direct Mr. Michael Blanchard is the CEO of Blanchard Consulting Group. He has extensive experience in the human resources field and has conducted or supported over 500 compensation planning, market research, and organizational development projects over the past seventeen years, with over thirteen years specific to the banking industry. Mike has presented to various national and state banking associations including the American Bankers Association, the Southeastern Bank Management and Director Conference, and the Western Independent Bankers association on a variety of compensation and board governance topics. With a masters degree in advanced industrial and organizational psychology, Mr. Blanchard s experience includes advising clients on assessing total compensation, incentive planning, and performance appraisals. 37

38 Blanchard Consulting Group Blanchard Consulting Group is a national compensation consulting company with offices in Atlanta, GA and Minneapolis, MN. Our mission is to deliver independent compensation guidance to Community Banks to help them attract, motivate and retain their key employees. With an exclusive focus on the banking marketplace since 2002, our lead consultants have a unique industry perspective and expertise to offer our clients. Why choose Blanchard Consulting Group? Exclusive and extensive experience in the banking industry helps us understand the market and the unique challenges facing banks in today s environment. We pride ourselves on our relationship and accessibility with our clients. We are a truly independent compensation consulting firm. We do not market any other services or products to our clients. Our staff has worked with over 400 community banks. Our CEO has a graduate degree in Industrial/Organizational Psychology which directly deals with workplace motivation and reward strategies. Our Lead Consultants are published authors in Bank Director, WIB, ABA, and several state and regional banking association publications. Multiple speaking engagements at Bank Director Conference, WIB, ABA, Bank CEO Network, Southeast Bank Management and Director Conference, and several additional state or regional banking associations. Blanchard Consulting Group is a Gold level sponsor for the Annual Bank Director Compensation Conference. 38

39 INDEPENDENT BANK COMPENSATION CONSULTANTS